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Domainers Beware - Don’t Be The Greater Fool
By Max | May 30, 2007
I have been reading a lot about domaining lately. I understand the basic idea. Register a www.xxxxx.com domain that someone might just type that in to their browser directly rather than searching. (type-in traffic) Then earn cash off the traffic when they click on one of the 50 advertisement PPC links.
It sounds like a great plan doesn’t it? Pay $9/yr for registration, sit back and collect cash without bothering to do any SEO work, content creation, or any thing else. It is the perfect hands off business.
Business 2.0 ran an article recently that has piqued everyone’s interest in this market. It is now well known that Kevin Ham is making big bucks with his domaining empire. He owns over 300,000 of them.
After doing some more research, I have come to the conclusion that domains are too expensive. The Business 2.0 article even touches on this.
Take, for example, the $26,250 Ham paid for Fruitgiftbaskets.com, or the $171,250 for Hoteldeals.com. “The amount he will pay is crazy,” says Bob Martin, president of Internet REIT, a domain investment firm that has raised more than $125 million from private investors, including Maveron, the venture firm backed by Starbucks founder Howard Schultz.
Nonsense, Ham says. The names are expensive only if you value them the way people like Martin do. The VCs and bankers, who were late to the domain gold rush, assess names by calculating the pay-per-click ad revenue and attaching a multiple based on how long it would take to pay off the investment.
Viewed that way, Ham’s personal portfolio alone is worth roughly $300 million. But some of Ham’s recent domain purchases would also look silly: They’d take 15 or 20 years just to justify the price, and that assumes continuation of the pay-per-click model.
I am sure Kevin Ham is a smart guy, but I don’t agree with him here. There is only one fundamental difference between the two domains www.fruitgiftbaskets.com and www.fruit-gift-baskets.com. Someone might actually type in the former when looking on the internet for fruit gift baskets. No one is likely to directly type in the hyphenated version. If you wanted to build a bigger website based on either domain, you will still have to create an online store or content, work on SEO, and market the site around the internet. With either domain, the work required to build a site around it will be the same. Still the only difference is the type in traffic.
Maybe by creating an online store, a domain owner can earn more than the PPC revenue provides, but the internet ad market is becoming more efficient and competitive. Any affiliate marketer can tell you that PPC is a tough game. This might account for a 2x multiple, but certainly doesn’t justify the high flying prices that some domain names fetch. I think a lot of this activity is speculative and the valuations are largely based on what the buyer thinks a future buyer might be willing to pay. For anyone familiar with the ‘00 stock market crash, you’ll realize this is a dangerous game. Instead of buying an asset which produces little income relative to its purchase price, why not give yourself a raise by putting your money to work buying a website.
To further illustrate my point, check out Tyler Cruz’s blog. He recently acquired the domain Starcraft2.net since the new game was announced. I don’t know how much Tyler paid for this domain, but he didn’t just register it. He bought it from someone. I am going to go out on a limb here, and say that starcraft2.net does not receive a ton of type-in traffic. I don’t know. Maybe Tyler will tell us. I would guess that starcraft.com and starcraft2.com get typed in before the .net domain does. Would Tyler have been better off just spending $9 and registering starcraft2fans.net or something like that? He still has to build up links, work on SEO, and other marketing to achieve a high rank in google for his keywords. What is the extra money really buying here?
There are still a lot of good opportunities to make money in domaining, but I think most of them rely on grabbing domains for cheap before the world finds out about it. Someone had the foresight to jump on a bunch of “iphone” domains when they heard the first rumors of Apple’s new product. They are the ones who are going to make a bunch of money selling their domains which they registered for $8.95. Watch out if you are the guy buying iphoneworld.com for $600. Think about the real value of what you are getting.
The bottom line is to be careful. Don’t get caught up in the domaining hype. A lot of these domain transactions have all the characteristics of a inflated price bubble where the real fundamental values aren’t taken into consideration. There are literally an infinite number of domains. Why pay more than you have to? In most cases the money would be better spent on marketing your site to get to that elusive google front page.
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June 4th, 2007 at 6:26 pm
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